Week 7 - Consolidated Group Financial Statements

Question 1

What it mean by faithful representation?

Answer 1

• To be reliable, information must represent faithfully an economic phenomenon (transaction or event)
• Faithful representation is all about substance over form:
• Information about economic transactions and events should be presented in accordance with the substance and economic reality of transactions/events and not merely their legal form.

Question 2

How does IFRS 3 define business combinations?

Answer 2

A transaction or other event in which an acquirer obtains control of one or more businesses.

Question 3

What are the 2 types of business combinations?

Answer 3

Type 1 - A new company may be formed in order to absorb one or more existing companies. The essential feature here is that the new company would physically take over the assets and liabilities of the existing companies and the existing companies would then cease to exist.

Or:
Formation of a group of companies:

• Type 2 - A company may be acquired by another company, but in this case the company being taken over would continue to exist (and would still, of course, keep its own assets and liabilities) - separate legal companies/entities.
• Acquiring company: Parent, Acquired company: subsidiary, Parent + Subsidiary = Group

Question 4

What is the group entity concept under IFRS 3?

Answer 4

This views the group as an “extended business unit” that conducts its activities under control of the parent company - no distinction between shareholders of the separate legal entities (parent and subsidiary companies).

• If less than 100% holding: Non-Controlling interests (NCI) are included as a part of equity and net income.

Question 5

Discuss the Principle of Control - IFRS 10.

Answer 5

• Even if the parent does not have the majority of voting rights, through ownership of share capital (>50%), it may still control another company.
• Control is the power to govern the financial and operating policies of an entity or business so as to obtain economic benefits from its activities.

Question 6

According to IFRS 10, a parent controls a subsidiary if and only if the parent has all of certain elements.

What are they?

Answer 6

• Power over the subsidiary - existing rights (such as the voting rights attaching to ordinary shares) that give the parent the ability to direct the relevant activities that significantly affect the subsidiary’s returns.
• Exposure, or rights, to variable returns from its involvement with the subsidiary.
• The ability to use its power over the subsidiary to affect the amount of the parent’s returns.

Question 7

What does goodwill represent?

Answer 7

Goodwill represents future economic benefits not capable of being individually identified and separately recognized.

Intangibles such as: workforce, reputation, innovative capacity, market power, etc.